Wandering around the vast halls at the Frankfurt motor show, it didn’t take long for one big trend to become apparent. Many of Europe’s hard-pressed mass-makers are on a mission to head upmarket. Here’s why.

There are two giant hurdles in front of companies including Peugeot-Citroën, Vauxhall-Opel, Ford of Europe and Renault’s European operations, among others. Firstly, the European new car market has slumped from around 16 million vehicles in 2007 to an expected 13 million in 2013.

This has led to massive over-capacity and under-utilized factories, which in turn leads to unprofitability. According to a report this week by Alixpartners, only 60 per cent of European car factories are operating at over the minimum profit-making capacity of 70 per cent. That means around 40 per cent of factories are loss-making before the manufacturer faces the next hurdle.

Pricing pressures on the mass-market brands have also become unsustainable. While the premium brands can (mostly) demand near full retail pricing, they also benefit from a healthy take-up of highly profitable optional extras by customers, the mass-makers are engaged in a hard-fought market, which sees cars as discountable consumer durables.

And even if your factory can produce a supermini at a small margin of profitability, the dealer may not be able to move the metal without discounts on the sticker price. No wonder, then, that Ford’s European arm expects to lose £1.2bn this year. Although both GM and PSA have managed to make big reductions on their 2012 losses, the Americans will still probably lose around £500m in Europe in 2013 and PSA around £700m.

Most industry bosses think 2013 marks the bottom of Europe’s falling new car market. The problem is that few are predicting an upturn anytime soon. Indeed, the new Seat boss Jurgen Stackman told Autocar that it is possible the European market would never return to its peak.

Moreover, VW boss Martin Winterkorn said at Frankfurt that the European car industry needs to cut capacity by another three million units – ‘around 10 factories’ – over the next few years, suggesting that he doesn’t expect the European market to bounce back. PSA boss Phillipe Varin also told reporters at Frankfurt he was looking for more reductions in manufacturing capacity.

The upshot is that the mass-makers are in a huge bind. They cannot force the market up and politicians will resist further reductions in capacity and the sacking of workers. Cost reductions are always possible, but have their limits.

Against this bleak backdrop, the majority of mass makers (especially those that build cars in Western Europe) can only try and drive upmarket, convincing buyers it is worth paying more for new cars.

Peugeot has been most upfront about this, using the 308 as the car to launch its upmarket ambitions. Ford also used Frankfurt to introduce the Vignale brand, which offers very high specifications as well as ‘lounge’ space at dealers and a single dealer contact. The Opel Monza concept is a signal that future Vauxhall Opel models will look more expensively engineered.

Another way of making bigger margins is to offer models with a huge range of tempting colour and trim options, as demonstrated by Opel’s Adam display at Frankfurt. Interestingly, so far only Citroën is looking at matching its product offerings to lower transaction prices by building a simplified range of models under the new C-Line brand. That said, Citroën looks like it may well have also pulled off the creation of DS as a new upmarket brand.

Trouble is, shifting existing brand perceptions is hugely difficult and if it can be pulled off, it could take many years. But if the European new car market has shrunk permanently, mass makers desperately need buyers to buy into their upmarket aspirations as quickly as possible.

Join the debate

The car manufacturers in schtuck have only themselves to blame. A business model involving a production infrastructure that only allows you a profit in years where there are record sales. Any downturn in sales and you're screwed, potty! They KNOW the market is cyclical so why leave themselves open to overcapacity?

They're at the crossroads; 1. Keep doing what you're doing and lock the factory gates, 2. beg for government money, 3. close a few factories or 4. hope & pray the public get on board and appreciate your squishy new dashboard.

The argument only exists if you assume that the overcapacity is somehow necessary. Strip out the overcapacity, shut factories fire workers, come out with a business model that's profitable based on 50% of current production, and generally assume that manufacturing low cost mass market items is probably likely to be unprofitable anywhere within the EU due to minimum wage demands and bolshy unions, and stop being sentimental about the weaklings.

Just because they were a great brand once doesn't mean it's not a good thing to let them die - it's mainly politicians attempting to keep their seats by subsidising work within the EU rather than letting nature take its course that's the problem - just like in nature if you try and keep every weakling and runt going you'll suffer. trim back the fat, kill unprofitable companies and let the market dictate what it wants.

This drive upmarket will leave plenty of space for cheaper brands to come in, and novel solutions like Citroens to give a pleasant alternative to soft feel plastics to stop entry level cars feeling so cheap, as lets face it, the DS3 might be a success but the DS4 and DS5 have fallen on their respective backsides, so the overall DS upmarket project isn't exactly flourishing, and Ford's Vignale idea already looks doomed to failure - the equivalent of a Ghia badge on the front and a posher waiting room in a dealership don't make for an enhanced ownership experience and won't pull people out of their A4's.

Young drivers in particular have never had it so expensive, young people aren't shying away from cars because they are distracted by iPhones, it's because the buying, running and insurance costs are ridiculous - if we want to accept that we want to keep putting more and more cars on the road ad infinitum then cars to fit their budget with free insurance deals, and designs that look funky rather than basic may well do the job.

Alternatively you could assume that with our crowded road network that a few less cars on the roads may not be such a bad thing.

If the British governments attitude to road tax and fuel duties and general living standards etc is anything to go by I'm not surprised the only people left selling cars are the manufacturers for the better off.

European car manufacturers are in real trouble, and i wonder how long it will be before we are importing cars like Fords Vauxhalls and Peugeots from China and India?

Most car buyers in Europe dont care about how a car drives, more care about what they think it says about them, hence the large number of low spec premium German cars being sold.
And most wont pay more for a car, so the makers will either go bust, or have to find ways of selling cars on the cheap, and that means making them somewhere else.

Pushing upmarket wont work, buyers will change brands to someone else offering better value. we can already see this with the success of the Koreans, and if the Europeans push upmarket they will hand the market to the Koreans, and maybe the Chinese

Someone has to go to France (in particular) and take a good documentary about the British car industry in the 60s and 70s, where unions and management contrived between themselves to destroy pretty well an entire industry, with a bit of help from central government for good measure. It's unlikely that PSA and Renault can pull off a 'German' stunt but they need to start swinging the axe at one end and kicking some backside at the other. I can't comment on the other nationalities but the French are capable of producing world-beating cars. They just somehow choose not to —or when they do, they choose to lose money doing it. The key word there is 'choose'.